Trump fuelled rally stalled as Yellen takes the hot seat

November 17, 2016 11:59 AM

After a robust surge in U.S. financial, industrial, and health care stocks post the U.S. elections sent the Dow Jones industrial average to new record high, the rally lost momentum on Wednesday as investors took a breather, and Trump’s effect started showing signs of waning. Asian stocks were mixed today, while European stocks also looked choppy as trading kicked off.     

The dollar strength made most of the headlines yesterday as the index rose to 13-year high, and investors are questioning whether the greenback still has room to move higher on the short run. I think the answer lies in Janet Yellen’s testimony before the Joint Economic Committee later today. Most Fed officials are in favour of 25 basis points hike in December, and markets are almost certain that the Fed will pull the trigger in their next meeting, so a December rate hike is already priced into the dollar. Markets are more interested in Yellen’s view on the economic effects of Trump’s proposed fiscal policies, which include aggressive infrastructure spending and tax cuts. Maybe she will avoid commenting on many of the questions related to Trump’s expected plans but if she indicates that aggressive fiscal policies mean tighter monetary policy than the dollar rally still has room to continue. 

Yellen’s testimony will be followed by comments from Fed President Dudley and U.S. CPI figures.

Bond markets also stabilised yesterday after yields on U.S. 10-year treasuries surged by more than 50 basis points from last week’s lows, suggesting that fixed income markets have moved enough and it’s time to see some consolidation after global bonds saw approximately $1.5 Trillion being wiped from their value.

Oil prices are falling for the second consecutive day as crude inventories in the U.S. rose by 5.3 million barrels in the week ending Nov. 11. I think in the next couple of days, fundamental data will be ignored and all focus will shift back into OPEC. There’s some optimism that members of the organisation including Russia will reach an agreement on Nov. 30 and this explains why we didn’t see a steep selloff after U.S. inventories data. However, tomorrow’s expected meeting on the side-lines of Doha’s Gas Exporting Counties Forum will provide some insight on whether the members are really becoming united or more divided ahead of Nov. 30 official OPEC meeting in Vienna.

About the Author

Hussein Sayed is chief market strategist at FXTM.